Lesson 12

UNIT V

LESSON

12WAGE AND SALARY ADMINISTRATION

CONTENTS12.0 Aims and Objectives

12.1 Introduction

12.2 Wage Determination Process

12.2.1 Job Evaluation

12.2.2 Wage and Salary Surveys

12.2.3 Group similar Jobs into Pay Grades

12.2.4 Price each Pay Grade – Wage Curves

12.2.5 Fine Tune Pay Rates and Determine Wage Structure

12.3 Components of Pay Structure in India

12.3.1 Wages

12.3.2 Basic Wage

12.3.3 Dearness Allowance (DA)

12.4 Administration of Wage and Salary

12.4.1 Objectives

12.4.2 Principles of Wage and Salary Administration

12.4.3 Elements of Wage and Salary System

12.5 Factors influencing Wage and Salary Structure and Administration

12.6 Wage Administration Rules

12.6.1 Minimum Wages Act, 1948

12.6.2 Payment of Wages Act, 1936

12.6.3 Adjudication of Wage Disputes

12.6.4 Wage Boards

12.6.5 Pay Commissions

12.6.6 Bonus

12.6.7 Payment of Bonus Act, 1965

12.7 Wage Differentials

12.7.1 Are Wage Differentials Justified?

12.7.2 Wage Differentials in India

12.8 Choices in Designing a Compensation System

12.9 Managerial Compensation

12.10 Indian Practices

12.11 Let us Sum up

12.12 Lesson End Activity

12.13 Keywords

12.14 Questions for Discussion

12.15 Suggested Readings

208Personnel Management Concepts 12.0 AIMS AND OBJECTIVES

The purpose of this lesson is to bring out the importance of designing an effectivecompensation plan that takes care of legal stipulations, industry practices, employeeexpectations, competitive pressures, etc., so as to attract and retain talent. After studyingthis lesson, you will be able to:

� Define ‘compensation’

� State the objectives of compensation planning

� Explain in detail how to establish wage rates

� Outline the factors influencing compensation levels

� Indicate the choices in designing a compensation system

� Discuss current trends in executive compensation in India

12.1 INTRODUCTION

Compensation is what employees receive in exchange for their contribution to theorganisation. Generally, employees offer their services for three types of rewards. Payrefers to the base wages and salaries employees normally receive. Compensation formssuch as bonuses, commissions and profit sharing plans are incentives designed toencourage employees to produce results beyond normal expectation. Benefits such asinsurance, medical, recreational, retirement, etc., represent a more indirect type ofcompensation. So, the term compensation is a comprehensive one including pay, incentives,and benefits offered by employers for hiring the services of employees. In addition tothese, managers have to observe legal formalities that offer physical as well as financialsecurity to employees. All these issues play an important role in any HR department’sefforts to obtain, maintain and retain an effective workforce.

12.2 WAGE DETERMINATION PROCESS

The need for equity is the most important factor in determining wage rates. This isachieved through the following steps:

� Find the worth of each job through job evaluation.

� Conduct a salary survey to find what other employers are paying for comparablejobs.

� Group similar jobs into Pay grades.

� Price each pay grade by using wage curves.

� Fine tune pay rates.

12.2.1 Job Evaluation

Job analysis offers valuable information for developing a compensation system in termsof what duties and responsibilities need to be undertaken. The worth of a job to theorganisation is as ascertained through job evaluation. Since the whole process is largelysubjective, a committee is appointed to collect information and come up with a hierarchyof jobs according to their value. The evaluation is done through the use of market pricingor through the use of ranking, point or factor comparison methods.

209Wage and

Salary Administration

12.2.2 Wage and Salary Surveys

While job evaluation ensures internal equity, wage and salary surveys ensure externalequity. A wage and salary survey provides information as to what other organisationsthat compete for employees are paying. The survey could cover all the jobs within anorganisation (obviously costly and hence avoided) or limited to benchmark jobs, jobs thatare used to anchor the company’s pay scale and around which other jobs are slottedbased on their relative worth to the firm. The benchmark jobs have the following basiccharacteristics.

� Many workers in other companies have these jobs.

� They will not be changing in the immediate future in terms of tasks, responsibilities,etc.

� They represent the full range in terms of salary such that some are among thelowest paid in the group of jobs, others are in the middle range and some are at thehigh end of the pay scale.

Formal and informal surveys (through telephone, for example) could be undertaken tocollect data on benefits like insurance, medical leave, vacation pay, etc., and so offer abasis on which to take decisions regarding employee benefits. Published sources alsoprovide valuable information regarding industry-wise trends in salary structures in andaround the country. The published sources in India include:

� Reports published by the Ministry of Labour.

� Pay commission reports.

� Reports of Wage Bonds appointed by Government.

� Reports of employees and employers’ organisations.

� Trade journals of specific industry groups, etc.

One of the major problems with these sources is the comparability of jobs in the surveyto jobs in the organisation. To overcome the limitations of published surveys, conductyour own surveys of important jobs. The following survey methods are generally used tocollect relevant wage-related information:

� Key job matching: Under this method, similar key jobs are identified between theorganisations and the relevant wage particulars about those comparable jobs arecollected.

� Key class matching: Similar classes of jobs are identified and the necessary dataabout those classes are collected.

� Occupational method: Certain basic occupational groups like clerks, officersmanagers are identified and then the necessary data is collected.

� Job evaluation method: All the parties participating in the survey method, use thesame method and same mechanism for evaluating similar jobs.

� Broad classification method: Under this method, broad groups of relativelyhomogeneous jobs, i.e., by industry, by profession or by geographical area aregrouped and the relevant information about these jobs is collected.

210Personnel Management Concepts

12.2.3 Group similar Jobs into Pay Grades

In this step, similar jobs (in terms of their ranking or number points as ascertained by thejob evaluation committee) are grouped into grades for pay purposes. The organisationcan now focus on, say 10 to 12 Pay grades, instead of hundreds of pay rates. A paygrade consists of jobs of approximately equal difficulty or importance as determined byjob evaluation. If the point method is used, the pay grade consists of jobs falling within arange of points. Ten to sixteen grades per job cluster (factory jobs, clerical jobs) iscommon.

12.2.4 Price each Pay Grade – Wage Curves

In the next step, pay rates are assigned to Pay grades through a wage curve. The wagecurve shows graphically the pay rates currently paid for jobs in each pay grade relativeto the points or rankings given to each job or grade, as depicted in Figure 12.1 below:

Figure 12.1: Plotting a Wage Curve

(The average pay rate for jobs in each grade [Grade I = 0-50 points, Grade II = 50-100points, Grade III = 100-150 points] are plotted and the wage curve fitted in).

A completed wage curve tells management the average relationship between the paygrade points and wage rates. It will show which pay is out of the trend line. If a job’s payrate is very high – where the current rates paid by the company fall well above or belowthe wage line – those wage rates are identified as ‘red circle’ rates. This only means thatpay is frozen or below average increases are granted until the structure is adjustedupward to place the circled rate within a normal range.

12.2.5 Fine Tune Pay Rates and Determine Wage Structure

Here the employees fix a pay range for each grade (Officer Grade I, II and III, forexample, in Banking industry). The wage structure of a company is nothing but a payscale showing ranges of pay within each grade.

Max

imum

Rat

e

Min

imum

Rat

e

0 100 200 300 400 500

10

9

8

7

6

5

Wag

e R

ates

(in

Rs.

)

Wage curve

Points for Jobs

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12.3 COMPONENTS OF PAY STRUCTURE IN INDIA

The pay structure of a company depends on several factors such as labour marketconditions, company’s paying capacity and legal provisions:

12.3.1 Wages

In India, different Acts include different items under wages, though all the Acts includebasic wage and dearness allowance under the term wages. Under the Workmen’sCompensation Act, 1923, “wages for leave period, holiday pay, overtime pay, bonus,attendance bonus, and good conduct bonus” form part of wages.

Under the Payment of Wages Act, 1936, Section 2 (vi), “any award of settlement andproduction bonus, if paid, constitutes wages.”

Under the Payment of Wages Act, 1948, “retrenchment compensation, payment in lieuof notice and gratuity payable on discharge constitute wages.”

However, the following types of remuneration, if paid, do not amount to wages underany of the Acts:

i. Bonus or other payments under a profit-sharing scheme which do not form a partof contract of employment.

ii. Value of any house accommodation, supply of light, water, medical attendance,travelling allowance, or payment in lieu thereof or any other concession.

iii. Any sum paid to defray special expenses entailed by the nature of the employmentof a workman.

iv. Any contribution to pension, provident fund, or a scheme of social security andsocial insurance benefits.

v. Any other amenity or service excluded from the computation of wages by generalor special order of an appropriate governmental authority.

The term ‘Allowances’ includes amounts paid in addition to wages over a period of timeincluding holiday pay, overtime pay, bonus, social security benefit, etc. The wage structurein India may be examined broadly under the following heads:

12.3.2 Basic Wage

The basic wage in India corresponds with what has been recommended by the FairWages Committee (1948) and the 15th Indian Labour Conference (1957). The variousawards by wage tribunals, wage boards, pay commission reports and job evaluationsalso serve as guiding principles in determining ‘basic wage’. While deciding the basicwage, the following criteria may be considered: (i) Skill needs of the job; (ii) Experienceneeded; (iii) Difficulty of work: mental as well as physical; (iv) Training needed;(v) Responsibilities involved; (vi) Hazardous nature of job.

12.3.3 Dearness Allowance (DA)

It is the allowance paid to employees in order to enable them to face the increasingdearness of essential commodities. It serves as a cushion, a sort of insurance againstincrease in price levels of commodities. Instead of increasing wages every time there isa rise in price levels, DA is paid to neutralise the effects of inflation; when prices godown, DA can always be reduced. This has, however, remained a hypothetical situationas prices never come down to necessitate a cut in dearness allowance payable toemployees.


DA is linked in India to three factors: the index factor, the time factor and the pointfactor.

� All India consumer price index (AICPI): The Labour Bureau, Shimla, computesthe AICPI (Base 1960 = 100 points) from time to time.

� Time factor: In this case DA is linked to the rise in the All India Consumer PriceIndex (AICPI) in a related period, instead of linking it to fortnightly or monthlyfluctuations in index.

� Point factor: Here DA rises in line with a rise in the number of index points abovea specific level.

� Other allowances: The list of allowances granted by employers in India has beenexpanding, thanks to the increasing competition in the job market and the growingawareness on the part of employees. An illustrative list of allowances is furnishedin Table 12.1 below:

Table 12.1: List of Allowances in the Organised Sector in India

� Attendance � Night shift � Tiffin� Books � Overtime � Transport� Car � Paternity � Telephone� Card (Credit card) � Pension � Uniform� City Compensatory � Provident Fund� Club Membership � Relocation� Computer � Servant� Deputation� Driver� Education� ESIS� Family� Group Insurance� Leave Travel� Lunch� Medical

Check Your Progress 1

Mention the three factors of Dearness Allowance in India.

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12.4 ADMINISTRATION OF WAGE AND SALARY

Employee compensation may be classified into two types – base compensation andsupplementary compensation. Base compensation refers to monetary payments toemployees in the form of wages and salaries. The term ‘wages’ implies remuneration toworkers doing manual work. The term ‘salaries’ is usually defined to mean compensationto office, managerial, technical and professional staff. The distinction, however, is rarelyobserved in actual practice. Base compensation, it should be noted here, is a fixed andnon-incentive payment on the basis of time spent by an employee on the job. Supplementarycompensation signifies incentive payments based on actual performance of an employeeor a group of employees. The term ‘compensation administration’ or wage and salaryadministration denotes the process of managing a company’s compensation programme.The goals of compensation administration are to design a cost-effective pay structurethat will attract, motivate and retain competent employees’.

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12.4.1 Objectives

A sound plan of compensation administration seeks to achieve the following objectives:

� To establish a fair and equitable remuneration offering similar pay for similar work.

� To attract qualified and competent personnel.

� To retain the present employees by keeping wage levels in tune with competingunits.

� To control labour and administrative costs in line with the ability of the organisationto pay.

� To improve motivation and morale of employees and to improve union-managementrelations.

� To project a good image of the company and to comply with legal needs relating towages and salaries.

12.4.2 Principles of Wage and Salary Administration

There are several principles of wage and salary plans and practices. The important onesamong them are:

1. Wage and salary plans should be sufficiently flexible.

2. Job evaluation must be done scientifically.

3. Wage and salary administration plans must always be consistent with overallorganisational plans and programmes.

4. Wage and salary administration plans and programmes should be in conformitywith the social and economic objectives of the country like attainment of equality inincome distribution and controlling inflationary trends.

5. Wage and salary administration plans and programmes should be responsive to thechanging local and national conditions.

6. These plans should simplify and expedite other administrative processes.

12.4.3 Elements of Wage and Salary System

Wage and salary systems should have a relationship with the performance, satisfactionand attainment of goals of an individual. Henderson identified the following elements ofa wage and salary system:

1. Identifying the available salary opportunities, their costs, estimating the worth ofits members, of their salary opportunities and communicating them to employees.

2. Relating salary to needs and goals.

3. Developing quality, quantity and time standards related to work and goals.

4. Determining the effort necessary to achieve standards.

5. Measuring the actual performance.

6. Comparing the performance with the salary received.

7. Measuring the job satisfaction of the employees.

8. Evaluating the unsatisfied wants and unrealised goals aspirations of the employees.


9. Finding out the dissatisfaction arising from unfulfilled needs and unattained goals.

10. Adjusting the salary levels accordingly with a view to enabling the employees toreach unreached goals and fulfil the unfulfilled needs and aspirations.

12.5 FACTORS INFLUENCING WAGE AND SALARY STRUCTURE AND ADMINISTRATION

The amount of compensation received by an employee should reflect the effort put in bythe employee, the degree of difficulty experienced while expending his energies, thecompetitive rates offered by others in the industry and the demand-supply position withinthe country, etc. These are discussed below.

a. Job needs: Jobs vary greatly in their difficulty, complexity and challenge. Someneed high levels of skills and knowledge while others can be handled by almostanyone. Simple, routine tasks that can be done by many people with minimal skillsreceive relatively low pay. On the other hand, complex, challenging tasks that canbe done by few people with high skill levels generally receive high pay.

b. Ability to pay: Projects determine the paying capacity of a firm. High profit levelsenable companies to pay higher wages. This partly explains why computer softwareindustry pays better salaries than commodity based industries (steel, cement,aluminium, etc.). Likewise, multinational companies also pay relatively high salariesdue to their earning power.

c. Cost of living: Inflation reduces the purchasing power of employees. To overcomethis, unions and workers prefer to link wages to the cost of living index. When theindex rises due to rising prices, wages follow suit.

d. Prevailing wage rates: Prevailing wage rates in competing firms within an industryare taken into account while fixing wages. A company that does not pay comparablewages may find it difficult to attract and retain talent.

e. Unions: Highly unionised sectors generally have higher wages because wellorganised unions can exert presence on management and obtain all sorts of benefitsand concessions to workers.

f. Productivity: This is the current trend in most private sector companies whenworkers’ wages are linked to their productivity levels. If your job performance isgood, you get good wages. A sick bank, for example, can’t hope to pay competitivewages, in tune with profit making banks.

g. State regulation: The legal stipulations in respect of minimum wages, bonus,dearness allowance, allowances, etc., determine the wage structure in an industry.

h. Demand and supply of labour: The demand for and the supply of certain skillsdetermine prevailing wage rates. High demand for software professionals, R&Dprofessionals in drug industry, telecom and electronics engineers, financial analysts,management consultants ensures higher wages. Oversupply kills demand for acertain category of employees leading to a steep fall in their wages as well.


List the three elements of wage and salary system.

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12.6 WAGE ADMINISTRATION RULES

The Government has adopted various methods to regulate wages in India such asprescribing minimum rates of wages, regulating payment of wages, settlement of wagerelated disputes through adjudication process, setting up of wage boards, etc.

Table 12.2: Institutions involved in Fixation of Wages

� Employer

� Collective Bargaining

� Legislation � Minimum Wages Act

� Wage Boards � Payment of Wages Act

� Pay Commissions � Adjudication Machinery

12.6.1 Minimum Wages Act, 1948

The Act prescribes minimum rates of wages for certain sweated and unorganised sectorscovered under the Act. The minimum wages can be fixed by hour, day, month or anyother longer period. The Act provides for setting up a tripartite body consisting ofemployees, unions and the government, to advise and assist in fixing and revising minimumwage rates. The rates could be subjected to revision at intervals not exceeding 5 years.The Act has not been able to prevent exploitation of labour due to a variety of reasons:

� The Vidyasagar Committee, 1965, pointed out that the desired objective of the Actcould not be realised due to inadequate and improper organisation of theadministrative machinery.

� Minimum wages have not been revised as stipulated in the Act. They are revisedafter much longer intervals.

� The Act did not define minimum wages nor specified any norms for its determination.

The Supreme Court has held (in 1992) that the appropriate authorities should take intoconsideration the components such as children's education allowance, medical needs,minimum recreation, provision for marriage, old age etc., while calculating minimumwages.

12.6.2 Payment of Wages Act, 1936

The main objective of the Act is to provide for regular payment of wages without anyunauthorised reductions to persons who are employed in any industrial establishment orfactory or railway or by a railway contractor whose monthly wages are less than Rs1600. The Act prescribes the following permissible deductions to be made from theemployee’s salary: fines, deductions for absence, deductions for (i) loss of goods entrustedto worker, (ii) house given by employer, (iii) services provided by employer, (iv) advancesgiven to worker, (v) tax payable by employer, (vi) deductions under court orders,cooperative society. PF, insurance premium, etc.

12.6.3 Adjudication of Wage Disputes

Collective bargaining is a procedure through which employee problems relating to variousissues including wages are settled through the process of joint consultation, in anatmosphere of ‘give and take’, trust and mutual confidence. If these problems are notsettled through collective bargaining, they may be settled through voluntary arbitration oradjudication. The awards given or reached by or through the arbitrator or adjudicator orcollective bargaining agreements form the basis for fixing wages in various organisations.


12.6.4 Wage Boards

This is one of the important institutions set up by the Government of India for fixationand revision of wages. Separate wage boards are set up for separate industries.Government of India started instituting Wage boards in accordance with therecommendations of Second Five-year Plan, which were reiterated by the Third Five-year Plan. Wage boards are not governed by any legislation but are appointed on an adhoc basis by the Government.

Each Wage Board consists of one neutral Chairman, two independent members and twoor three representatives of workers and management each. The Wage boards have tostudy various factors before making any recommendations. The recommendations ofWage Board are first referred to the Government for acceptance. The Government mayaccept with or without modification or reject the recommendations of the Wage Board.The recommendations accepted by the Government are enforceable by the partiesconcerned.

The Wage boards take the following factors into consideration for fixing or revising thewages in various industries:

(i) Job evaluation, (ii) Wage rates, for similar jobs in comparable industries, (iii) Employees’productivity, (iv) Firms’ ability to pay, (v) Various wage legislations, (vi) Existing level ofwage differentials and their desirability, (vii) Government’s objectives regarding socialjustice, social equality, economic justice and economic equality, (viii) Place of the industryin the economy and the society of the country and the region, (ix) Need for incentives,improvement in productivity, etc.

The Wage Boards fix and revise various components of wages like basic pay, dearnessallowance, incentive earnings, overtime pay, house rent allowance and all other allowances.

12.6.5 Pay Commissions

Wages and allowances of Central and State government employees are determinedthrough the pay commissions appointed by the appropriate government. So far the CentralGovernment has appointed five pay commissions. The disputes, arising out of paycommission awards and their implementation are decided by commissions of inquiry,adjudication machinery and the joint consultative machinery.

12.6.6 Bonus

An important component of employees’ earnings, besides salary, is bonus. Starting as anad hoc and ex-gratia payment, bonus was claimed as dearness allowance during WorldWar II. In the course of labour history, it has metamorphosed from a reward or anincentive for good work, into a defendable right and a just claim. Subsequently, underThe Payment of Bonus Act, 1965, it secured the character of a legal right. The dictionarymeaning of ‘bonus’ is an extra payment to the workers beyond the normal wage. It isargued that bonus is a deferred wage payment which aims at bridging the gap betweenthe actual wage and the need based wage. It is also said that bonus is a share of theworkers in the prosperity of an organisation. The third argument is that bonus is primarilya share in the surplus. But it is only incidentally treated as a source of bridging the gapbetween the actual wage and the need based wage.

12.6.7 Payment of Bonus Act, 1965

The Act defines an employee who is covered by it as one earning Rs 2,500 p.m. (w.e.f.1.4.93) basic plus dearness allowance and specifies the formula for calculating the allocablesurplus from which bonus is to be distributed. The minimum bonus to be paid has been

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raised from 4 per cent to 8.33 per cent (w.e.f. 25.9.75) and is sought to be linked toincreased productivity in recent times. Through collective bargaining, the workers, throughtheir representative union, can negotiate for more than what the Act provides and get thesame ratified by the government, if necessary. In the absence of such a process, the Actmakes it mandatory to pay bonus to employees (who have worked in the unit for not lessthan 30 working days in a year) following a prescribed formula for calculating the availablesurplus. The available surplus is normally the gross profits for that year after deductingdepreciation, development rebate/investment allowance/development allowance, directtax and other sums referred to in Sec. 6. The Act applies to every factory or establishmentin which 20 or more persons are employed in an accounting year. Currently the positionis such that even if there is a loss, a minimum bonus needs to be paid treating the sameas deficit to be carried forward and set off against profits in subsequent years (Sec. 15).The Act is proposed to be changed since the amount of bonus, the formula for calculatingsurplus, and the set off provisions have all been under serious attack from various quarters.

Table 12.3: Bonus Calculations in India

� Bonus is calculated on a salary of Rs 2,500 per month.

� Bonus is to be paid at a minimum of 8.33 per cent of the salary of an employee.

� The bonus is to be paid within 8 months from the close of an accounting year.

� If in any year the available surplus exceeds the amount of minimum bonus payable toan employee, the employer shall pay a higher bonus subject to a minimum of 20% ofsalary or wage.

� Bonus is paid out of available surplus of an accounting year after deducting the sumsreferred to in Sec. 6. Even if there is no surplus, bonus has to be paid, treating it as‘deferred wage’.

� To claim bonus, the employee must have worked for 30 days in that year.

12.7 WAGE DIFFERENTIALS

Differentials in wages for jobs are inevitable in any industry. The reasons are not far toseek:

Table 12.4: Reasons for Wage Differentials

Wage differentials Reasons

Interpersonal differentials Differentials in sex, skills, age, knowledge, experience

Inter-occupational differentials

Varying requirements of skill, knowledge, demand-supply situation

Inter-area differentials Cost of living, ability of employers to pay, demand and supply situation, extent of unionisation

Inter-firm differentials Ability of employer to pay, employees’ bargaining power, degree of unionisation, skill needs, etc.

Wage differentials perform important economic functions like labour productivity, attractingthe people to different jobs. Since most of the workers are mobile with a view to maximisingtheir earnings, wage differentials reflect the variations in productivity, efficiency ofmanagement, maximum utilisation of human force, etc. Attracting efficient workers,maximisation of employee commitment, development of skills, knowledge, utilisation ofhuman resources, maximisation of productivity can be fulfilled through wage differentialsas the latter determines the direct allocation of manpower among different units,occupations and regions so that the overall production can be maximised. Thus, wagedifferentials provide an incentive for better allocation of human force – labour mobilityamong different regions and the like.


Wage differentials play a pivotal role in a planned economy in the regulation of wagesand development of national wage policy by allocating the skilled human force on prioritybasis. Development of new skills, knowledge, etc., is an essential part of human resourcedevelopment. Shortage of technical and skilled personnel is not only a problem for industriesbut it creates bottlenecks in the attainment of planned goals. Thus, wage differentials, toa certain extent, are desirable from the viewpoint of national interest. As such, theyprobably become an essential part of national wage policy. Complete uniform nationalwage policy is impracticable and undesirable.

12.7.1 Are Wage Differentials Justified?

Wage differentials on the basis of occupations, units and areas (when real wages aretaken into account) can be justified on the basis of equal pay for equal work amongworkers. They are also justified in view of varying conditions of demand and supply andvaried job requirements like skill, knowledge, aptitude, ability, experience, etc. But theobject of the Government is to minimise income inequalities and inequalities in thedistribution of wealth. Thus, wage differentials are not desirable in a socialistic pattern ofsociety. However, formulating a uniform wage policy ignoring differences in individualskills, knowledge, etc., are constrained by limitations in a unit’s ability to pay varyingliving costs in different regions, varying demand and supply conditions, differences inoccupations, etc., rendering uniformity impracticable. Hence, a compromise betweenuniform wage policy and wage differentials has to be developed keeping in view theprinciples of a socialistic pattern of society.

12.7.2 Wage Differentials in India

Interpersonal, inter-unit, inter-occupational wage differentials are more predominant inunorganised sector of Indian economy. But even in organised sector and public sectorunits, wage differentials are quite common. However, the tendency appears to be towardsminimisation and regularisation of wage differentials and to narrow down the gap betweenmaximum and minimum wage in a unit. Wage differentials on the basis of sex are howevercommon, mainly in unorganised sector of the economy. It is observed that certain industrialtribunals had awarded different wages for male and female workers not on the groundthat the work done is unequal but on the grounds that the wages of female employeeshave always been somewhat lower than those of male workers, that women workerssupport a smaller family and that the cost of employing women workers is higher.However, it is felt that further steps should be taken in order to minimise wage differentialsnot only in unorganised sector but also in organised and public sector undertakings.

12.8 CHOICES IN DESIGNING A COMPENSATION SYSTEM

The compensation system that is followed by a firm should be in tune with its own uniquecharacter and culture and allow the firm to achieve its strategic objectives. A widevariety of options confront a firm while designing such a system.

1. Internal and external pay: Pay equity, as stated previously, is achieved when thecompensation received is equal to the value of the work done. Compensation policiesare internally equitable when employees believe that the wage rates for their jobsapproximate the job's worth to the organisation. Perceptions of external equityexist when the firm pays wages that are relatively equal to what other firms arepaying for similar types of work.

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2. Fixed vs. variable pay: Nowadays variable pay programmes are widely followedthroughout many organisations and for all levels of employees. Widespread use ofvarious incentive plans, team bonuses, profit sharing programmes have beenimplemented with a view to link growth in compensation to results. Of course,while using variable pay systems, management must look into two issues carefully:

� Should performance be measured and rewarded based on individual, groupor organisational performance?

� Should the length of time for measuring performance be short term or longterm?

3. Performance vs. membership: Knowledge-based organisations these days followa performance-based payment plan offering awards to employees for cost savingsuggestions, bonuses for perfect attendance or merit pay based on supervisoryappraisals. 3 M's encouragement of innovation through this route, for example, haspaid off in what has become a legend in the field of product development (one of itschemists developed the immensely popular product ‘Post-it’ when 3M gave timefor the employee and announced a handsome bonus for the final result. Mostorganisations, however, still pay their employees based on the number of hours ofwork per week coupled with certain benefits for serving t he company loyally for aparticular period.

Box 12.1: Guidelines for Effective Performance-based Pay Systems

To be fair to employees, organisations should keep the following guidelines in mind while institutingmerit-pay systems

� Establish high standards of performance, so that only the truly outstanding employees emergeas winners.

� Develop accurate performance appraisal systems. The focus must be on job-specific, results-oriented criteria as well as employee behaviours.

� Train supervisions in the mechanics of carrying out appraisals and offering feedback toemployees in a proper way.

� Tie rewards closely to performance.

� Use a wide range of increases. Also, make pay increases meaningful.

4. Job vs. individual pay: Most traditional organisations – even today – decide theminimum and maximum values of each job independently of individual workers(who are placed in between these two extremes), ignoring their abilities, potentialand the ability to take up multiple jobs. Such job-based pay systems may, in the end,compel capable workers to leave the company in frustration. To avoid suchunfortunate situations, knowledge-based pay systems (or skill-based ones) havebeen followed increasingly in modern organisations. In this case employees arepaid on the basis of the jobs they can handle or the talents they have that can besuccessfully exploited in various jobs and situations.

Box 12.2: Suitability of Job-based and Knowledge-based Pay Systems

A job based-pay system is suitable when: � Jobs do not change often � Technology is stable � Lot of training is required to learn a given job � Turnover is relatively how � Employees are expected to move up through

the ranks over time � Jobs are fairly standardised within the

industry

Individual-based pay system is suitable when: � The firm has relatively educated employees

with both the ability and willingness to learn different jobs

� The firm's technology, processes are subject to frequent change

� Vertical growth opportunities are limited

� Opportunities to learn new skills exist � Teamwork and employee participation are

encouraged


Organisations will grant an increase in pay after the employee masters variousskills and demonstrates these according to a pre-determined standard. One of theimportant limitations of this method is that employees can became discouragedwhen they acquire new skills but find very few rewarding growth opportunities orhigh-rated jobs where they can use their talents successfully.

Box 12.3: Broad banding vs Competency Based Pay System

Organisations that follow a skill-based or Competency Based Pay System frequently usebroad banding to structure their compensation payments to employees. Broad brandingsimply compresses many traditional salary grades (say 15 to 20 grades) into a few widesalary bands (three or four grades). By having relatively few job grades, this approach triesto play down the value of promotions. Depending on changing market conditions andorganisational needs, employees move from one position to another without raisingobjectionable questions, (such as when the new grade is available, what pay adjustmentsare made when duties change etc.) As a result movement of employees between departments,divisions and locations becomes smooth. Employees with greater flexibility and broader setof capabilities can always go in search of jobs in other departments or locations that allowthem to use their potential fully. Broad banding, further, helps reduce the emphasis onhierarchy and status. However, broad banding can be a little unsetting to a new recruitwhen he is made to roll on various jobs. Most employees still believe that the existence ofmany grades helps them grab promotional opportunities over a period of time. Anyorganisation having fewer grades may be viewed negatively – as having fewer upwardpromotion opportunities. Moreover, a number of individuals may not want to move acrossthe organisation into other areas.

5. Below market vs. above market compensation: In high tech firms R&D workersmight be paid better than their counterparts in the manufacturing division. Bluechip firms such as HLL, Nestlé, Procter & Gamble, TCS, Hughes Software Systemsmight pay above market compensation to certain groups in order to attract (andretain) 'the cream of the crop'. To grow rapidly and to get ahead of others in therace, especially in knowledge-based industries, most companies prefer to pay above-market salaries. Above market wages are typical in well-established manufacturingunits operating in a highly competitive environment. Firms paying below markettend to be small, young and non-unionised.

6. Open vs. secret pay: In the real world, the issue of paying conpensation openly orin a secret way may often become a bone of contention between employees andthe employer(s). Current research evidence indicates that pay openness is likely tobe more successful in organisations with extensive employee involvement and anegalitarian culture that encourages trust and commitment. Open pay eliminatesdoubts in the minds of employees regarding equity and fairness - because there isequal pay for equal work. But open pay has a downside. First, managers are forcedto defend their compensation decisions publicly. The question of how much payone should get is more or less decided by the manager - based on his own subjectiveassessment of various factors. In such decision, it is not easy to please everyone.Second, the cost of making a mistake in a pay decision increases when pay is open.Third, to avoid never-ending and time-wasting arguments with employees, managersmay eliminate pay differences among subordinates despite differences inperformance levels. This may, in the end, force talented people to leave theorganisation. Pay secrecy involves withholding information from the recruitsregarding how much others make, what raises others have received and evenwhat Pay grades and ranges exist within an organisation. Pay secrecy givesmanagers some amount of freedom in compensation management, since paydecisions are not disclosed and there is no need to justify or defend them. Employees

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who do not know how much others are getting have no objective base for pursuingcomplaints about their own pay. Secrecy also serves to cover up inequities prevailingwithin the internal pay structure. Again, secrecy surrounding compensation decisionsmay lead employees to believe that there is no direct relationship between pay andperformance. Pay secrecy, however, is a difficult policy to maintain because mostof the pay-related information is now available on the Web. Anyone with access tothe Internet can easily find out what a position is worth in the job market.


Fill in the blanks:

1. ........................ offers valuable information for developing a compensationsystem in terms of what duties and responsibilities need to be undertaken.

2. ........................ paid to employees in order to enable them to face theincreasing dearness of essential commodities.

3. ........................ is one of the important institutions set up by the Governmentof India for fixation and revision of wages.

4. ........................ is a metamorphosed from a reward or an incentive for goodwork, into a defendable right and a just claim.

5. ........................ in the mechanics of carrying out appraisals and offeringfeedback to employees in a proper way.

12.9 MANAGERIAL COMPENSATION

Organisations decide executive compensation packages, consisting of basic pay,allowances, perquisites, stock options, etc., based on a number of factors. The UnitedStates Compensation institutes’ Phoenix plan uses 28 compensable factors:

Table 12.5: Phoenix Plan – Compensable Factors

� Job related experience � Time spent in planning � Training time required � Contact with suppliers/customers � Frequency of review of work � Impact on departmental budget � Utilisation of independent choice � Directing of others. � Frequency of reference to guidelines � Training of staff/physical stress experienced � Frequency of work transferred � Time spent working under deadlines � through supervisor � � Analytical complexity � Time spent in hazardous conditions � Time spent in processing information � Supervisors reporting to position level � Travel outside work location � Salary grade to which this position reports � Salary grade of positions supervised � Management responsibility � Revenue size � Asset size � Employment size � Budget size � Payroll size


The Hay Group, another specialised US Agency, uses three compensable factors:accountability, problem-solving and know-how. Sibson and company determines basecompensation depending on the market value of the job, its relationship to other positionsin the organisation and the person’s value to the organisation based on long-termperformance and experience. The Compensation Survey Report of Business InternationalAsia – Pacific Limited, Hongkong considered the following factors to determine executivecompensation: education, experience, scope of activities, need to negotiate, type ofproblems handled, decision making authority, influence on results, size of the unit managed,number of people supervised, number of reporting steps to the head of unit.

12.10 INDIAN PRACTICES

Executive compensation in India is basically built around three important factors: jobcomplexity, employers’ ability to pay and executive human capital. The complexity of achief executive’s job would depend on the size of the company as measured by its salesvolume, earnings and assets’ growth, the geographic dispersal of the unit, etc. Theemployer’s ability to pay is also a major factor to be considered while deciding executivecompensation. A sick bank, for instance, cannot afford to pay the same kind of salary toits executives as that of a healthy and growing bank. This partly explains why executivecompensation in public sector undertakings is less when compared to private sectorunits.

Box 12.4: Executive Compensation: Private Sector vs. Public Sector

In a well publicised front page news sometime back The Economic Times mentioned aboutthe miserable salary levels of top executives in public sector units in India. For example theState Bank of India chief is paid 10% of HDFC Bank Managing Director, BHEL's chiefgetting about Rs.10 to 12 lakhs per year as against ABB's MD getting nearly Rs.40 to 50lakhs; Indian Oil Corporation's chief getting Rs.10 to 15 lakhs per annum as against RelianceIndustries' Ambanis getting a package of over Rs.10 crore per annum. Salary levels in 'hot'private sector such as BPO, hospitality, biotechnology 'Media', IT, Telecommunications,Oil, Automobiles and Insurance are way above the packages offered to executives in publicsector for various reasons such as: overstaffing, inefficient processes, pressure on marginsdue to competition, appointment of people without requisite skills at the top level, politicalinterference especially in pricing the products or services, legal constraints etc.

The economic theory of human capital says that the compensation of a worker should beequal to his marginal productivity. The productivity of an executive, likewise depends onhis qualifications, job knowledge, experience and contribution. Indian companies usuallystructured executive compensation along the following factors: salary, bonus, commission,PF, family pension, superannuation fund, medical reimbursement, leave travel assistance,house rent allowance and other perquisites. In recent years, instead of increasing thebase compensation, companies have been enhancing the worth of an executive job throughnovel payment plans based on earnings/assets or sales growth of the company over aperiod of time, well-supported by an ever-expanding list of allowances and perquisitesincluding stock options, educational, recreational, academic allowances and several otherdevelopmental initiatives aimed at improving the overall personality of an executive.

Protecting your Valuable Employees from the Eyes of the Competition(not playing the salary game?)

With the battle for talent escalating into a war, Indian companies are going all out toretain their prized employees. Two approaches have gained visibility and popularity inrecent times. The first is internal and includes improving communication, changing work

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rules, increasing pay and even tightening phone security of a person. If the person inquestion is a high performer with a high risk of leaving, companies like Reckitt Benckiser,go on an overdrive with the milk and honey. Ego massaging services are initiatedimmediately. Eicher has a ‘key man policy’ in place to prevent ‘stars’ from leaving thecompany. The insurance policy, a juicy carrot for the top performers, however, comeswith a rider: if the person stays for an agreed period he earns a certain amount but if heleaves before that, the company gets a larger amount. Retention bonuses are also quitecommon. At Mahindra & Mahindra, 50 per cent of the employees’ bonus comes in theform of a fixed deposit that can be encashed after a mutually agreed time period.The second method is external and focused on broking the raiding firm. Four years agoPepsi even went to the extent of filing a case against Coke for poaching its employees.Non-poaching agreements, explicit or implicit, have also gained popularity. Some firmstry to foil poaching by signing up several firms. Other companies such as SaskenCommunication Technologies, Honey Well, Johnson & Johnson deal with the problem ina novel way: allowing employees complete freedom to think and act independently,opportunities to upgrade skills, offering jobs with stretch, pull and challenge etc.


State whether the following statements are true or false:

1. External equity is determined through job analysis.

2. Key jobs are those most numerous in the firm.

3. An example of indirect compensation is 'pensions'.

4. Wage surveys determine point values for jobs.

5. 'The concept of comparable worth' tries to reduce the male-female salarydifferential.

6. Pay levels are determined by combining job evaluation results with surveywage rates.

7. Jobs with similar value are combined into pay ranges.

8. The predominant approach to employee compensation in India is still the skill-based system.

9. Because of inflation, compensation rates have to be adjusted upwardperiodically to help employees maintain their purchasing power.

10. Pay secrecy does not give freedom to mangers in compensation management.

12.11 LET US SUM UP

Compensation administration intends to develop the lowest-cost pay structure that willnot only attract, inspire and motivate capable employees but also be perceived as fair bythese employees.

Establishing wage rates involves five steps: evaluate jobs, conduct salary survey, developPay grades, use wage curves, and fine tune pay rates.

The pay structure of a company depends on several factors such as labour marketconditions, company's paying capacity, legal provisions, prevailing wage rates, demandand supply of labour, degree of unionisation etc.


The wage policy in India is built around certain cardinal principles: (i) equal pay for equalwork (ii) living wage for all workers so that they lead a decent life (iii) payment of wageson appointed dates without unauthorised deductions (iv) Resolving wage related issuesthrough collective bargaining (v) payment of statutory bonus at 8.33 per cent as per legalprovisions (vi) ensuring a fair, equitable wage plan for various employees withoutsignificant wage differences etc.

While designing a compensation system, every company needs to pay attention to:(i) internal as well as external equity (ii) fixed vs variable pay (iii) payments based onperformance or membership (iv) Job based pay or knowledge-based pay (v) payment asper market rates (vi) open vs secret pay etc.

Executive compensation in India is built around three important factors: job complexity,employers' ability to pay and executive competency levels.

12.12 LESSON END ACTIVITY

Infotech Enterprises Ltd. has 4,000 employees and wishes to develop a compensationpolicy in all its divisions [(i) Engineering design services, (ii) Geographical InformationSystems, and (iii) Software Development and Services] to correspond to its dynamicbusiness strategy. The company wishes to employ a high quality workforce capable ofresponding to a competitive business environment. Suggest different compensationobjectives to match Infotech's business goals.

12.13 KEYWORDS

Compensation: It is what employees receive in exchange for their contribution to theorganisation.

Wages: The amount paid by the employer for the services of hourly, daily, weekly,fortnightly employees (ILO).

Incentives: Motivational devices used such as bonuses or commissions to encouragespecial work effort.

Salaries: Remuneration paid to the clerical and management personal employed on amonthly or yearly basis. However the distinction between wages and salaries need notbe observed in actual usage. Both may mean remuneration paid to an employee forservices rendered.

Earnings: Total amount of remuneration received by an employee during a given period.

Wage rate: It is the amount of remuneration for a unit of time, excluding incentives,overtime pay etc.

Wage structure: Consists of various pay scales showing ranges of pay within eachgrade.

Wage policy: Principles acting as guidelines for determining a wage structure.

Minimum wage: Wage sufficient to sustain and preserve the efficiency of the workerand to provide him basic amenities.

Wage curve: Curve in a scatter diagram representing the relationship between relativeworth of jobs and wage rates.

Pay equity: An employee's perception that compensation received is equal to the valueof work performed.

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Pay grades: Groups of jobs within a particular class that are paid the same rate.

Compensation administration: Deciding about how much an employee should be paidobserving internal as well as external equity.

12.14 QUESTIONS FOR DISCUSSION

1. What is pay structure? How is it designed?

2. What are the factors influencing wage structure?

3. Write notes on:

a. Need based wage

b. Wage boards

c. Minimum Wages Act

4. Explain the various methods of fixing wages and salaries in an organisation.

5. Write notes on:

a. State regulation of wages

b. Bonus

c. Time wage plan vs Piece wage plan

6. How does effective compensation management help an organisation achieve itsstrategic objectives?

7. Critically examine the components of a compensation package in organised industryin India.

8. What are the principal objectives of wage and salary administration? What factorsshould be taken into account while deciding executive compensation?

9. Write short notes on:

a. Executive compensation

b. Wage differentials

10. What are the pros and cons of broad banding, and would you recommend yourcurrent employer (or some other firm you are familiar with) use it? Why or Whynot?

Check Your Progress: Model Answers

CYP 1

Factors of Dearness Allowance

1. Index Factor

2. Time Factor

3. Point Factor

CYP 2

Three elements of wages and salary system are:

1. Measuring the actual performanceContd....

226Personnel Management Concepts 2. Comparing the performance with the salary

3. Measuring the job satisfaction of the employees.

CYP 3

1. Job Analysis

2. Dearness Allowance (DA)

3. Wage Boards

4. Bonus

5. Train Supervisions

CYP 4

1. F, 2. F, 3. T, 4. F, 5. T, 6. T, 7. T,

8. F, 9. T, 10. F

12.15 SUGGESTED READINGS

VSP Rao, Human Resource Management, Excel Books, New Delhi, 2005

D K Bhattacharyya, Human Resource Management, Excel Books, New Delhi, 2006

P L Rao, Comprehensive HRM, Excel Books, New Delhi, 2004

Lesson 12

Documents

wage rates

wage differentials

job evaluation wage

india administration

reports of wage bonds

wage determination processthe

pay scale

terms of salary